Basis Points

Basis points are a financial measuring unit that expresses percentage-based information in a granular fashion. One basis point is equal to 1/100th of 1%, and 100 basis points are equal to 1%. When disclosing annuity fees, interest rate spreads and crediting rates, insurance companies typically express the information in terms of basis points.

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  • Written By
    Thomas J. Brock, CFA®, CPA

    Thomas J. Brock, CFA®, CPA

    Investment, Corporate Finance and Accounting Professional

    Thomas Brock, CFA®, CPA, is a financial professional with over 20 years of experience in investments, corporate finance and accounting. He currently oversees the investment operation for a $4 billion super-regional insurance carrier.

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  • Edited By
    Michael Santiago
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    Michael Santiago

    Senior Financial Editor

    Michael Santiago is a skilled writer and editor with over a decade of experience in various industries. As a senior financial editor, he collaborates with a team of experts to develop compelling and accurate content.

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  • Reviewed By
    Chip Stapleton
    Chip Stapleton

    Chip Stapleton

    FINRA Series 7 and Series 66 License Holder

    Chip Stapleton is a financial advisor who has spent the past several years of his career working primarily in financial planning and wealth management. He is a FINRA Series 7 and Series 66 license holder and passed the CFA Level II exam in 2022.

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  • Updated: December 21, 2023
  • 3 min read time
  • This page features 3 Cited Research Articles

Key Takeaways

  • Often referred to as bps or bips, basis points are regularly used to express interest rate changes of less than 1%. 
  • Annuity providers use basis points to disclose annuity fees, interest rate spreads and crediting rates.
  • Investors use basis points to compare fee structures and evaluate the investment performance of stocks, bonds, mutual funds, mortgage loans and other financial instruments.

Why Are Basis Points Used?

Basis points, also known as bps or bips, are a straightforward way to express granular changes in percentage-based measures. They give market participants a clear means to gauge very small or very large changes in interest rates. The concept can be somewhat confusing to people who are used to working with data expressed in percentages, but it can be easily grasped with some exposure. 

The U.S. Federal Reserve, for example, communicates its federal funds rate changes in terms of basis points. Since 2021, most of its rate hikes have entailed moves of 25 basis points, or 0.25%.

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Price Value of a Basis Point (PVPB)

One basis point equals one-hundredth of 1%, which is equivalent to 0.01% or 0.0001. Therefore, 100 basis points are equal to 1%, which is equivalent to 0.01. 

You can use a calculator or simple arithmetic to convert basis points to a percentage and, likewise, a percentage to basis points.

Formula to calculate basis point

How Do Annuity Providers Use Basis Points?

Annuity providers use basis points to disclose annuity fees, such as agent commissions, administrative fees, surrender charges and mortality expenses. Basis points are also used to disclose interest rate spreads and crediting rate changes. In many instances, they are also used to express historical rate differences between products and crediting methods.

Understanding basis points can help consumers quantify the financial impact of these variables. Ultimately, this aids decision-making and optimizes the quality of retirement plans.

How Do Investors Use Basis Points?

Basis points impact a myriad of financial instruments in addition to annuities, including treasury bonds, corporate bonds, common stocks, mortgage loans and fund-style vehicles, such as mutual funds and exchange-traded funds (ETFs).

Investors use basis points to compare the fee structures of these vehicles and evaluate investment performance. For some high-net-worth individuals and institutional investors, a few basis points of performance can equate to massive amounts of money.

Other Frequently Asked Questions About Basis Points

What is the price value of a basis point?

The price value of a basis point is the measure of change in the price of a bond resulting from a one-basis-point change. It is used to assess price volatility and interest rate risk.

What is dollar duration?

Dollar duration is the measure of change in the price of a bond in dollar terms, resulting from a change in the market interest rate of 100 basis points. It provides an indication of the interest-rate sensitivity of a bond.

How do traders and analysts use basis points?

Basis points allow traders and analysts to describe and interpret movements in interest rates and other investment variables in a granular fashion.

Please seek the advice of a qualified professional before making financial decisions.
Last Modified: December 21, 2023
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